On the Holidays and Turbulent Decembers

Happy Thanksgiving, merry Christmas, happy New Year, and that’s a wrap on 2018, it’s been a bit of a ride hasn’t it. It’s been quite a year over here to say the least, and December gave us a fun finish to be sure. December is typically a positive month for the markets and, fun fact, the Dow has only fallen in 25 Decembers going back to 1931. December 2018 though, as we look back through the lens of a few days, that was a ride wasn’t it, giving us the worst performance for the stock markets since the Great Depression.

Poor performance for sure, but were we looking at the start of a bear market, a recession, or simply a market correction? On this end, as rough as the ride was, the belief was mostly that the market was in correction and likely a lot of the movement was motivated by uncertainty which has a way of motivating panic selling. The yield curve was not inverted and there were many positive signs we were seeing with the economy as a whole that pushed the belief that it was a correction, but with worrisome headlines often focusing on trade issues and political dysfunction a certain type of investor gets panicky and sells. A lot of investors getting panicky and this drives some large sell offs, and a historic December.

“We humans are a fickle bunch. If there's one thing you can pretty much guarantee, it's that things are never really good enough. We seem to focus excessively on the negatives in our lives at all times… But a lot of the focus on the negative seems to be the result of a natural bias of ours - negativity basis. And it can be extremely destructive if it's not understood.”

Bull, bear, recession, correction, it doesn’t matter which, it is a top priority to come at the market with the knowledge that there will always be some level of uncertainty, that there will sometimes be turbulence, that there is always some amount of risk to be had. It’s not just watching the markets, and not just the news, and not just the economic indicators, it’s watching all of these and more for the whole picture. It’s also having the patience to watch and wait before making the decision to sell off or buy more with the understanding the turbulence in the market might need to settle some in order to see a clear direction.

“In the world we live in, few look at risk. Most only look at reward. The few who do look at risk (the educated, the Street savvy, etc.) make their money at the expense of the great unwashed majority who swallow the noise nonsense about getting rich quick. Investing is a get rich slowly process. You have to put your money at risk in the face of uncertainty. Emotions run rampant before the uncertainty of floating, fluctuating, often violent and volatile markets. Constantly discounting prices are fickle and full of surprises. Disorder is usually the norm.”

It’s pretty clear now that December was a correction and waiting it out was the correct path but what motivates the patience to achieve that path?

Part of the mindset that allows for the patience to weather these storms is investing as if all of us are already rich. That’s not to say that unnecessary risks are taken or that a the decisions aren’t hard because of an abundance of plenty, that’s to say that this is not living paycheck to paycheck and that the long game of investing allows the understanding that the lottery is rare but true value is always out there, you just have to be able to see it. That, finding the value, having to the ability and the patience to find the value amid the noise the risk and fly-by-nights is the rich mind set. It’s not a scheme, it’s the patience and vision to wait it out for the true value.

Happy Thanksgiving, merry Christmas, happy New Year, and that’s a wrap on 2018. Welcome to 2019 and thank you so very much for letting us be a part of your life.

The October Effect & Modes of Decision

Beware, beware the ides of, well, of October?  Actually no, but what is it with the month of October that the spooks of Halloween give way to the worry of a market loss or even disaster in the eyes of many, so much so that it’s been given a name, the October effect? The October effect is the theory that stocks typically drop in October, and to be fair October does have some tradition in hosting memorable market dropping events: the crisis in 2008, Black Monday of 1987 fame, and let’s not forget 1929’s infamous Black Tuesday. Do these market events, disastrous as they were, give us enough to justify the ill will over October or is it as Jason Zweig wrote in The Wall Street Journal recently, “investors’ fear of September and October is based less on evidence and more on what psychologists call “availability”—the human tendency to judge how likely an event is by how easily we can recall vivid examples of it.”

Strong market drops certainly make for strong memories that lend themselves to availability, what’s not so available is what the non-historic months actually look like. Dig past availability and what you’ll find is that October returns on average have been positive since the mid 19th century and as of 2002 October has been the third best month with returns averaging at 1.6%.

Let that sink in. Since 2002 October averages out positive, even with 2008 numbers sitting in there.

Now, while the fear may not be justified the fact that October is one of the most volatile months for the market, as clearly exhibited over the last few weeks, does nothing to belay those fears. What does work though is having a plan and sticking to it, and never ever trading on fear. Part of the plan is having solid information, such the fact that there has been a 13% drop in the market every year at some point since 1950. Knowing that allows for more patience when judging buy and sell signals, i.e. is this the start of a bear market or is this just a market correction and a buying opportunity. 

Examining past trends and cycles is vital to guiding trading decisions, but equally vital is looking further than market fluctuations to explore a more holistic look at economic health as whole. The market sometimes just moves with no real discernable reason, emotional folk do emotional things, so we follow other measures to help gauge if moves are short or long term.

These short-term moves are unnerving, but how is the economic outlook as a whole? Well, we’re actually in a pretty good spot. The unemployment rate for September 2018 was at 3.7%, it was sitting at 3.9% the previous two months. 3.9% is good in and of itself but getting down to 3.7%, that’s the lowest it has been since 1969, so promising. Another important indicator we follow is new housing starts.  That number is a little down month over month but it is sitting within the range that it has been over the last three years, in other words it is stable. There don’t look to be any wild shifts coming there in the near future.

The yield curve is another indicator that we are always watching, it is usually a leading indicator that a recession is on it’s way. The yield curve is the difference between interest rates on long and short term debt vehicles, bonds. If short term bonds are paying higher interest rates than long term bonds are that means the yield curve is inverted, and inverted yield curves indicate a potential incoming recession. At the moment the yield curve is not inverted or close to inversion.

Looking at all of this we’re able to exercise patience and let these market moves exhaust themselves before making any major moves. The volatility can make for a wild ride but unemployment rates are good, housing starts are good, and the yield curve doesn’t have us looking down the barrel of a recession. There are two other trend points, and one point of news, that have us optimistic right:

  • Typically the third year of a presidential cycle is usually the strongest year in that cycle for the markets

  • The markets have been positive after midterms every time since WWII

  • Earnings reports have been strong recently

Looking at all of this together and we are not seeing any reason for panic or selling off, in fact, signs are pointing to a healthy economy with some promising buy opportunities.

Sell Offs and Opportunities

Monday February fifth the Dow just happened to experience the largest point loss in its history, as anyone who has had an even cursory access to media this week knows. It's been all over the news and much of the narrative that was being pushed was of course on the doom and gloom side of life. It makes for better headlines and sound bites, even if it's not accurate. The narrative over here is a bit different; the headline over here is opportunity.

The drop was certainly the largest in the Dow's history but the Dow is at its highest historically and what is not being mentioned was that in terms of percentage it doesn't even reach the top twenty.  The twentieth largest percentage drop was 6.98%, which was on September 29, 2008 by the by, while Monday's drop was only 4.60%, well within a normal range. The market has tended to have a sell off of around 14% around every twenty months over the last seventy years, a market correction, which the market really hasn't seen in over two years, it's past due.  The majority of signals around point to a healthy market and a healthy economy, with nothing indicating a downturn anywhere on the six to nine month horizon. Worth noting as well is that just because the market has a large sell off does not mean the economy is heading into a recession, in fact this has happened fairly recently when the S&P 500 saw losses of 12% and 19% in 2015 and 2011 respectively.

Should you be worried about further drops? Absolutely not, for one thing part of the reason that portfolios are diversified is to protect against downturns, different products react very differently to the varied stimuli that is the economy.  A properly diversified portfolio prepared for market corrections allow for prime moments of opportunity. While diversified portfolios can look a lot of different ways depending on your needs and your risk profile, having a properly diversified can mean having cash on hand for these moments of opportunity.  Many folk feel the need to be fully invested when invested or fully out when nervous, that's not the case over here. There is always an opportunity to pick up a stock or fund that may be off not but which indicators tell us is going to eventually pick up, market corrections offer this on a much wider scale. While corrections can make a lot of people nervous they really are a huge boon to your portfolios potential.

Speaking of the importance of portfolio diversification why don't we check out this piece from MarketWatch,  "XIV trader: ‘I’ve lost $4 million, 3 years of work and other people’s money"  Investors with XIV in real terms are short S&P volatility future, it's a derivative of a derivative and while the potential upside is large the downside can be devastating. We typically stay away from high risk products like this for our clients, preferring educated buys to gambling, if we were to buy though it would be a small percentage of the portfolio. The investor in the post had the vast majority of holdings in XIV and is now out almost $4,000,000.

Patience, research, diversified portfolios, and patience are all core to successful investing, especially patience. No matter how much research is done there is no predicting the future market fluctuations, there are only indicators as to what is likely and the patience to catch the right wave. The current sell off has so far stayed and should continue to stay in a healthy range, and as such we're monitoring for opportunities. We'll be reaching out over the next few weeks to discuss what's happening and our plans for it, but if you would prefer a meeting please don't hesitate to reach out to us, especially if there have been any life changes that would change your goals.

Sources: New York Times, CNBC, Thomson Reuters.

August 2017

Time monitoring markets this week has certainly been divided by what has turned out to be a historic hurricane and flooding. Up here in Austin we were lucky to only experience a few days of rain while Rockport, Houston, and points in between and now beyond have taken a beating from this slow moving behemoth. Harvey is still at tropical storm levels, still hammering away, and looking to head east.

Rather than sharing our thoughts on what's happening with the markets this week we thought we'd share some numbers and links that might be useful to those affected by Harvey and for those looking for ways to help. These are just a handful that we've seen and admittedly mostly for Houston because we've got such a large contingency of family and friends in the area. If there's anything we can do, don't hesitate to give us a call.

Please be safe out there folks.

Emergency Contact Info source khou.com

Phone numbers:

Houston Police Department: 311 or 713-884-3131

Houston Fire Department: 311
*If you are awaiting rescue, prominently display a towel or sheet from a door or window so we can spot you. Addresses are tough to spot.

United States Coast Guard:

281-464-4851
281-464-4852
281-464-4853
281-464-4854
281-464-4855
713-578-3000

Center Point Energy: 713-207-2222

Texas United Way: 211

FEMA:
Registration - 1-800-621-3362

National Emergency Child Locator Center: 1-866-908-9570

American Red Cross: 1-800-RED-CROSS

Disaster Distress Hotline: 1-800-985-5990

Links:

FEMA - Registration: Click here to register with FEMA

American Red Cross -Registration: Click here to check in with the American Red Cross

American Red Cross - Shelter: Click here to for a list of shelters

American Red Cross -Volunteer: Click here to volunteer

Neighborhood Evac and Emergency Shelter Information

General Information:

National Weather Service sites to watchs:

Where to Donate:

Where to Volunteer:

If You Evacuate:

  • Leave as soon as instructed to and follow the instructions of officials
  • Determine safe evacuation routes
  • Pack essential items including medicine, important documents, first aid kits, blankets, pillows, phone chargers, critical contacts information, basic need equipment such as glasses or contacts
  • Take your pets with you, don’t forget your pet’s food and medication
  • Secure your home by locking all doors and windows
  • Shut off your homes utilities
  • Unplug electrical equipment including appliances, TV’s,and radios
  • Take your vehicle and house keys with yo

On Rules, Earnings, and Goals

On Rules

Hello and welcome to summer, and welcome to the Department of Labor's new rules. The summer, well we might just be wishing for a little bit of fall over here, it's kind of a scorcher, but the Department of Labor rules we're welcoming with open arms.

The implementation for the rules started on June 9 with a transition period for the rest of the year. Now you may be asking why the rules were brought about, what they are, and what all of this means to you and to us, so let's start with the why. The most basic reason for the new rules is simply a trend change in retirement savings. Originally we had, and still have, the ERISA rules that were enacted in 1974 to cover retirement plans and pensions from employers. These rules are much more stringent than the rules that were covering IRAs and other personal retirement accounts. The addition of the DOL rules comes about because the amount of retirement savings now sitting in personal IRAs and the like has grown exponentially and the need to protect those accounts as stringently as 401(k)s was evident.

The new rules bring over the added protections to all retirement accounts and hold any advisor who services those retirement accounts to fiduciary standards. Mandated fiduciary standards for advisors managing retirement accounts just means that the advisor has to hold the clients' best interests above their own when making investment choices or recommendations. The rules help prevent concealment of any conflicts of interest.

"But wait a minute, I thought advisors already put the clients' interests first." You say.

Well, that's true of Kozun Capital Management in all of our accounts, including non-retirement accounts. That is not true of all advisors by any means. The new rules will hold the most change for commission based advisors and companies who were only held to a suitability standard for their accounts. The products selected for clients could potentially have been selected because the commission for them was higher than with other products, not because the investment would best serve the client. Commission based advisors and companies will no longer be able to do this with any retirement accounts they hold for clients. There are exceptions, but for the most part there is a higher standard of protection for the public.

How will all of this affect us? The truth of the matter is it won't affect your accounts or relationship with us. We are fee based and we have always operated under the fiduciary standard for your retirement accounts and your non-retirement accounts.  Every investment choice or move we've made was made because it was the best one at the time to serve your interest and help you reach your goals.

That being said, the fiduciary standards will not affect commission based advisors on any non-retirement accounts that they manage. We would highly recommend speaking with family and close friends about the new rules to ensure that they know about them. They might not know, and they might not know that that their accounts might not be protected by the higher standards of the fiduciary rule.

On Earnings Reports

Typically, as we've spoken on before, the first year of a president's term is usually the worst in terms of market performance. There is no crystal ball to tell us how that will play out this go round, but even if that is true in terms of this cycle, we are continuing to see some very positive signs with the market this year. Specifically we are seeing some positive results with earnings in Q4 of 2016 and Q1 and Q2 of 2017.  Whether this continues or not anyone can say, but if it does it could lead to some growth opportunities in the market that we haven't seen in a while. Either way, it doesn't change our methods and we're continuing to examine the trends for buying opportunities.

On Goals & Milestones

Speaking of the fiduciary duty, part of that is being knowledgeable as to client goals. So, how are yours? Has anything in your life recently changed that might suggest a shift in focus or planning? Please give us a call or email and let us know, this information is vital to us in serving you.

With goals in mind, if you would like a retirement report or education savings report detailing where you are on the road to retirement or paying for your child's education with your investments and possible rates of return please email kozun@kozuncapitalmanagement.com to request this and a meeting or call to discuss it with you. It is important for us to make sure that we stay on the same page as you.


Market Commentary Disclosures:

The information contained herein is obtained from sources believed to be reliable but its accuracy and completeness is not guaranteed. Due to market volatility, any opinions expressed herein are subject to change without notice. Investors should be aware that there are risks inherent in all investments, such as fluctuation in investment principal.

The S&P is a market-cap weighted index composed of common stocks of 500 leading companies in leading industries of the U.S. economy.

The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks.

Indexes are unmanaged, do not incur management fees, costs and expenses cannot be invested directly. Past performance is no guarantee of future results. Returns do not include sales charges or fees an investor would pay to purchase the securities they represent. Such costs would lower performance. Index returns include reinvestment of all dividends.

Sources: New York Times, CNBC, Thomson Reuters.

Neither NEXT Financial Group, Inc. nor its Representatives give tax or legal advice.

2017 So Far

Happy New Year! Sure, a little late on the wishing, but we wanted to get past all the false starts that we too often see in January with resolutions and goals. You know the story, we all know the story. It's a new year, I resolve to ____, and come February all is back as it was. The thing is goals don't need January to happen; they don't need the New Year.

We want to take the whole year approach to goal setting and reexamining. That's why we'd like to start off today by asking how's your goal health? Now is as good a time as any to examine what you're trying to do, what does that path look like, how might your life have changed over the last year in ways that change your goals. Do your goals need a reset? Let's look specifically to retirement goals, are you where you want to be with your savings, has anything changed in your life that changes the retirement horizon? A quick way to determine where you are on the road is to figure how close you are to having twenty-five times your annual income in retirement saving, because that's the estimate on how much it takes to keep your standard of living going after you retire. If your goals have changed or you just want a deeper dive into that road map, give us a call and we can re-examine where you are and if any additional steps need to be taken. That is what we are here for after all.

The brand new year also brought in a brand new President. Let us just get this out of the way now; we're not going to be discussing our thoughts on the new President. Many of you most assuredly have strong feelings one way or the other, but that's not what you come to us for and really that's not our expertise.  We will however talk about the role of the four year presidential cycle in regards to how we make our investment decisions.

While there is certainly no predicting the future, we often can and do look at the past for guidance. What we typically see from the last year of the cycle, the fourth year of the presidency, until the summer of the first year of a newly elected president are typically some of the roughest times for the market while years two and three are typically stronger times for the market. Using the past as a guideline will have us looking for more buys early on and looking to years two and three as "harvest times" to take profits on the buys. And this cycle turns out completely different, no worries, past data is just a guide not a hard and fast rule, if the signals we look at don't look promising we move on.

One very promising note from Q4 2016, earnings were the best they have been since 2014. Earnings, with the exception of Q4 2016, have not for the most part been strong. The strength of Q4 combined with what looks to be a two year consolidation period for the market implies that we could be seeing the start of a bull market, and if earnings continue to be strong we should see the continuation of a bull market.

Even with a potential bull market investors are still concerned because of 2000 and 2008. There are certainly always risks, especially with our current geopolitical climate right now and high uncertainty with politicians worldwide, but there are some potential gains. We're looking at a possibility of multiple deregulatory events and lowered taxes which push a bull market into a long term bull market.

The market is fluid and the market is going to run through periods of high volatility, it always will. Whatever happens, be aware that on average annually the market tends to periodically drop by 15%. Don't worry about these drops, we don't. A combination of strong earnings and market drops are not moments of worry but moments of opportunity, buying opportunity, which we are always looking for.

That's enough about the markets. Happy new year, now go outside and enjoy the day, listen to some music, read a book, just live the life you need to. If you need some suggestions as to music and reading, we are thoroughly enjoying Leonard Cohen's last album "You Want It Darker" and currently reading “Thinking, Fast and Slow” by Daniel Kahneman. We're always on the lookout for suggestions on new books to peruse and music to soothe, so please pass any along.

If in looking at the last year you discover that maybe your goals have changed, let's set up a meeting to discuss what that means for your investment options moving forward. If you just want to meet to discuss where you are, give us a call as well.

Market Commentary Disclosures:

The information contained herein is obtained from sources believed to be reliable but its accuracy and completeness is not guaranteed. Due to market volatility, any opinions expressed herein are subject to change without notice. Investors should be aware that there are risks inherent in all investments, such as fluctuation in investment principal.

The S&P is a market-cap weighted index composed of common stocks of 500 leading companies in leading industries of the U.S. economy.

The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks.

Indexes are unmanaged, do not incur management fees, costs and expenses cannot be invested directly. Past performance is no guarantee of future results. Returns do not include sales charges or fees an investor would pay to purchase the securities they represent. Such costs would lower performance. Index returns include reinvestment of all dividends.

Summer Volatility and Beyond

Summer of last year on a nondescript Thursday, May 21, 2015 to be exact, the S&P 500 closed at 2,130.82.  That's the highest the index had ever closed up until that point, and it remains the record as June 14, 2016, and probably beyond. The highest closing since that record was set is currently sitting at June 8, 2016 with a closing price of 2,119.12, and the lowest during that time period was on February 11, 2016 at 1,829.07. Pricing has remained relatively flat, with some high volatility along the way. It's not the most favorable of markets for investors, but it's not so uncommon either to see this much volatility and it is certainly not uncommon to see gains being so elusive.

The question of "Why", well, there are a great number of mitigating factors that have us where we are right now.  Many of the reasons for the current market situation are indeed areas that we've previously discussed in regards to fears of recession.  Some of the more major reasons, in general terms, are worries about global economic growth, the oil industry, S&P 500 profits declining for three consecutive quarters, and of course the exceptionally odd election cycle which is breeding its own special level of uncertainty. We are however starting to see a shift towards a better outlook with a number of the mitigating factors such as oil prices improving some from their lows and the dollar gaining stability against the major currencies among other indications. The election outlook, well that depends on who you are now doesn't it.

One other rather large item that had been adding to volatility was Brexit and the run-up to the July 23 UK referendum to vote on remaining in the European Union. This happened because proponents of the referendum were pushing for it on the lines that the people of the UK haven't had any say on the issue since 1975.  The run-up to the vote itself was the cause of some of the highest volatility in the European markets in a decade. The UK holds more weight than say Greece, so any changes will have a larger effect over Europe and ripple over the rest of the world.

St. Louis Federal Reserve President James Bullard said recently on the possibility of the UK voting to leave, "the next day nothing happens." The UK leaving will take much planning, and the process will take time and the larger ramifications of the action will come later after the roadmap is set. Nothing may have happened the next day in terms the UK actually removing itself from the EU however, plenty happened with the markets the next day. As we've discussed before, investing and markets can be highly emotionally driven, and though nothing was fundamentally changed the next day the vote to leave quickly drove high volatility in markets around the world, high volatility and significant drops.  The Monday after the vote the pound hit a 31 year low against the dollar with an 11% drop, the S&P 500 itself dropped 10% the first two trading days after the referendum.

Much of that early stage volatility as settled down some and we're seeing markets across the world begin to climb again. Tuesday, June 28, had the S&P climb 1.78%, and the Dow Jones industrial average rose by 1.57%. The UK separation will resolve itself one way or the other, but something else will eventually crop up to take its place.  There is always something lurking around the corner that has the potential to increase short term market volatility, as has been evidenced especially well over the last year.

This is why it's important to focus on long term strategy and goals, and not getting mired in the day to day muck.  Remember we are investing for the future; we are not investing for today. It is all too easy to focus on the short term view, especially with the deluge of news, information, and just plain noise out there.

High volatility and the market's struggles to find gains certainly make a lot of investors nervous, and often reactionary.  Reactionary is precisely where we don't want to be and why discipline is so important.  The ups and downs are expected and portfolios are planned accordingly for this.  The goals are in place to ward off reactionary statements, and to remind us that we are not investing for today; we are investing for the future, your future.

 

Market Commentary Disclosures:

The information contained herein is obtained from sources believed to be reliable but its accuracy and completeness is not guaranteed. Due to market volatility, any opinions expressed herein are subject to change without notice. Investors should be aware that there are risks inherent in all investments, such as fluctuation in investment principal.

The S&P is a market-cap weighted index composed of common stocks of 500 leading companies in leading industries of the U.S. economy.

The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks.

Indexes are unmanaged, do not incur management fees, costs and expenses cannot be invested directly. Past performance is no guarantee of future results. Returns do not include sales charges or fees an investor would pay to purchase the securities they represent. Such costs would lower performance. Index returns include reinvestment of all dividends.

Neither NEXT Financial Group, Inc. nor its Representatives give tax or legal advice.

http://www.wsj.com/articles/u-s-consumer-prices-rose-0-2-in-may-1466080463

http://seekingalpha.com/article/3980145-u-s-recession-unlikely-given-macroeconomic-conditions                                                                                                                                  

http://seekingalpha.com/article/3980145-u-s-recession-unlikely-given-macroeconomic-conditions                                                             

http://www.forbes.com/sites/timmaurer/2016/01/16/why-the-stock-market-is-volatile-why-volatility-hurts-and-what-to-do-about-it/#88e6a9a5fc22                               

http://www.reuters.com/article/us-global-markets-idUSKCN0ZE028

Market Volatility

Market volatility in recent months has a lot of investors focus all over the place on anything and everything including the Federal Reserve’s next moves, corporate earnings, the Chinese economy, the global economy, oil prices, recession concerns, and even the rather unusual election cycle in the U.S.

With so much volatility investors are also questioning what drives the markets and what drives them to invest in the markets. Why is it that we do invest our money in the market?  The simplest answer, the obvious answer, looking past specific goals such as retirement or education funding is that we are looking to make money or generate income through those investments with capital gains and dividends.  A long term diversified portfolio invested in the stock market has historically offered better returns than other investment options. 

Investors are looking to make money, they're looking to protect wealth, and with all the market ups and downs they're wondering how exactly stocks are priced. 

How indeed?  

This may come as a surprise to some but there is an immense amount of research into how stocks are priced.  Of course there is, everyone wants the magic bullet.  The answer as to how prices are determined is both simple and immeasurably complex. The short version of price determination is simply that prices are a gauge of market sentiment.  That gauge however is from a combination of all available market information, including individual company earnings, rules and regulations, and how the consumer or investor feels about the stock.

Stock price is what we say it is, it is a combination of what all investors say it is.  Simply put the price is what we are willing to buy a stock at, or sell.  Ultimately what this means for the individual investor is that timing the market exactly is akin to reading tea leaves. Take heed future day traders, the market doesn't here your screams.

Getting back to recent volatility and what is driving the swings, let's take a look at some concerns that have been a driving force in the change in market sentiment, namely, China, oil, and fears of recession.  The headlines, also driving market sentiment in some Schrodinger's cat type of scenario, while having a point are also often unnecessarily caustic.  "The old news adage, "If it bleeds, it leads," applies to sensational financial articles, too."

China did, and still does, have some economic hurdle to face, however its currency has seen some stabilization and is on the rise recently.  More importantly, and what the "if it bleeds, it leads" types seem to not focus on, is the fact that exports to China from the U.S. only account for 1% of the U.S. GDP.  That's right just 1%.

Energy earnings have been in decline in large part because of oil.  Oil is not a minor market concern; producers are pulling back on spending and cutting back on the workforce all of which effect energy earnings and the market as a whole.  There is still much distance to be made up, but oil has seen some recovery recently.

China and oil and a whole host of other things have led to some fears of recession.  The idea of a new recession around the corner hasn't just been put out there by our economic card sign holders, always letting us know that THE END IS NIGH, THE END IS NIGH.   Economists and a wide assortment of industry leads are maintaining the risk of a recession in the next 12 months has increased, “Economists at Bank of America Merrill Lynch peg the chance of recession in the next 12 months at 25%.”  There is by no means a consensus on this and even if there were, forecasting the economic future is in no way an exact science.  The most highly trusted out there are often wrong.  Ben Bernake, Chairman of the Federal Reserve from 2006 to 2014, stated:

“Overall, the U.S. economy seems likely to expand at a moderate pace this year (2007) and next, with growth strengthening somewhat as the drag from housing diminishes”

That Bernake quote dates from February of 2007, the National Bureau of Economic Research points to December of 2007 as the beginning of the recession, or as is otherwise know, the Great Recession.  There are countless indicators, forecasting models, and truly intelligent people who are constantly pocking and prodding at the data but it is just not possible to predict the future, not for anyone. In fact Warren Buffet himself had this to say about predictions:

“The cemetery for seers has a huge section set aside for macro forecasters. We have in fact made few macro forecasts at Berkshire, and we have seldom seen others make them with sustained success.”

For all the doom and gloom, there are also a lot of reasons pointing to a positive outlook for the U.S. economic forecasts of 2016.  Take for instance the unemployment rate which was at 4.9 percent in January and continued on at the same rate through to February.  That is the lowest it has been since April of 2008, it’s the first time it has been under 5 percent in 8 years.  Along with the unemployment numbers there was some very strong job growth, in fact job growth far exceeded economist’s earlier expectations.

The markets should also find some amount of pricing stability as the presidential election cycle moves closer to its conclusion and less uncertainty.  In general the markets react better when the unknowns in terms of candidates is reduced, i.e. fewer candidates remaining with fewer variations to look at. 

That’s just in general though, no seers over here.

The thing about worrying about a recession is that any feelings on the subject also feed into the wisdom that makes up stock prices.  There are indicators, and the market itself is one, but the thing is the market often overshoots or undershoots what is happening.  It's often impossible to tell if prices are as they should be until later, hindsight and all that.

There have been up to 47 recessions since 1790, that’s a recession every 4.8 years if we average it out.  Markets do and will continue to go up over long periods of time, but they don’t usually do so in a straight line.

Is 2016 gearing up for the next one? The truth is that nobody really knows.  There will be a recession again though, there always is.  It is within the very cyclical nature of the economy, of the markets.  This is why we diversify, what thrives in one market period will flounder in another.  This is why we work with you to discover your investment objectives and the levels of risk you are will to take as an investor.  

Whatever the news is, it's often just so much noise that is better left ignored. The bottom line is that the market has its seasons of smooth and its seasons of high volatility.  We can’t predict the future either, but we do diligently strive to prepare you and your investments for the likeliest possibilities.

Market Commentary Disclosures:

The information contained herein is obtained from sources believed to be reliable but its accuracy and completeness is not guaranteed. Due to market volatility, any opinions expressed herein are subject to change without notice. Investors should be aware that there are risks inherent in all investments, such as fluctuation in investment principal.

The S&P is a market-cap weighted index composed of common stocks of 500 leading companies in leading industries of the U.S. economy.

The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks.

Indexes are unmanaged, do not incur management fees, costs and expenses cannot be invested directly. Past performance is no guarantee of future results. Returns do not include sales charges or fees an investor would pay to purchase the securities they represent. Such costs would lower performance. Index returns include reinvestment of all dividends.

Neither NEXT Financial Group, Inc. nor its Representatives give tax or legal advice.

http://www.wsj.com/articles/economists-ceos-recession-risk-rising-1455237811

http://www.marketwatch.com/story/bank-of-america-sees-25-chance-of-a-us-recession-in-2016-2016-02-09

http://247wallst.com/economy/2016/03/21/15-reasons-that-us-recession-risks-have-almost-vanished-for-2016/2/

http://247wallst.com/economy/2016/03/17/philly-fed-shows-unexpected-return-to-growth-in-manufacturing/

http://www.latimes.com/business/la-fi-jobs-report-takeways-20160304-story.html

The Barometer

Sitting here at the end of February, let’s go ahead and reflect on January and what is referred to as the January Barometer. The January Barometer is, simply put, the theory that the performance of the S&P 500 in January dictates the direction the market will take for the rest of the year, or as is otherwise said “As goes January, so goes the year”.   According to a recent New York Times article the “January barometer has been right 87.7 percent of the time since 1950 (ignoring basically flat years) and 75 percent of the time including all years.”

So, about January, it was something of a roller coaster ride with something of a down turn in the market, for those that haven’t been following along at home. 

Why the ride you might be asking?  There are any number of factors that can be pointed to as to why the direction changed and why it has been such a tumultuous ride.  Gross domestic product growth slowed (which led to analysts changing profit forecasts for Q1, from an increase to a decrease), profits in the energy sector are nearly non-existent (as has been said, 5 dollars is officially gas money again), and a whole host of other worries from a fear of recession to concern over the Chinese economy.  All of these things are potential factors and pieces of the puzzle that has the market where it is.

Should you be worried?

No, not so much.  The January Barometer is much better at guessing a surge forward for the year than it is at predicting a downturn. 

“For example, CNBC notes the S&P 500 Index has risen in 23 out of 35 Januarys since 1979.  Over the next 11 months, the market subsequently rose in 19 of those 23 years—meaning a positive January has successfully predicted a winning February through December 83% of the time.  But in the years when January lost ground, there was only a 33% success rate in predicting a losing year.”

A 33% success rate at predicting a down trend isn’t something that you need to worry about, and the Barometer is only a theory, of which there are countless others to choose from.  Throw a penny and you’ll hit some theory based on some correlation between the market and whatever.  The fact of the matter is that market is driven by any number of variables and correlations can be found just about anywhere, but correlation is not causality.

The market is going to have its ups and downs, and we have been due a market correction for some time now.   Whether the market ends the year on a high note or a low note remains to be seen, there is no way to accurately predict what the year will bring.  That’s why it is important to remove the emotional aspect of investing, it is a long game where making emotional choices with only the current market environment in mind will more often than not hurt long-term return.

What we do know is that since December 31, 2013 the Dow has only gained 30 points, a long flat market like that can have a similar effect of as bear market.  We also know that Federal tax receipts were up by 5.2% yearly in January, this strongly suggests that US economic activity is expanding as do the unemployment claims.   While we certainly don’t take the January barometer as proof positive to anything, the stock market is currently in a downtrend and as such most of our portfolios are fairly conservative.  It is a marathon, not a sprint.

 

Market Commentary Disclosures:

The information contained herein is obtained from sources believed to be reliable but its accuracy and completeness is not guaranteed. Due to market volatility, any opinions expressed herein are subject to change without notice. Investors should be aware that there are risks inherent in all investments, such as fluctuation in investment principal.

The S&P is a market-cap weighted index composed of common stocks of 500 leading companies in leading industries of the U.S. economy.

The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks.

Indexes are unmanaged, do not incur management fees, costs and expenses cannot be invested directly. Past performance is no guarantee of future results. Returns do not include sales charges or fees an investor would pay to purchase the securities they represent. Such costs would lower performance. Index returns include reinvestment of all dividends.

Sources: New York Times, CNBC, Thomson Reuters.

Neither NEXT Financial Group, Inc. nor its Representatives give tax or legal advice.


 

A baker’s dozen: 13 smart planning moves

The end of the year is fast approaching, and now is the perfect time to review items you might want to consider as you get set to enter 2016.

Let me stress that it is my job to assist you, and I would be happy to review the options that are best suited to your needs. When it comes to tax matters, I recommend you check with your tax advisor.

Investment and financial planning

1. Is it time to rebalance your portfolio? Changes in the market can cause your asset allocation targets to shift. Now may be the time to consider adjustments. But let’s review what’s happened in your portfolio. In the unlikely case December finishes with a bang, 2015 won’t be a ‘three-peat’ and build on the impressive advances made in 2013 and 2014. That may minimize any tweaks to your targets.

In any event, any adjustments we might recommend should not generate a negative taxable event this year. 

In other words, let’s be careful about taking profits in December when we can take them in January and push any capital gain into 2016.

2. Review your income or portfolio strategy. Are you reaching a milestone in your life such as retirement or a change in your circumstances? If so, this may be just the right time to evaluate your approach.

3. Take stock of changes in your life and review insurance and beneficiaries. Let’s be sure you are adequately covered. At the same time, it’s a good idea to update beneficiaries if the need has arisen. Circumstances in your life may have changed during the last year. Documents must be updated or you may deny intended beneficiaries their rightful inheritance.

Tax planning

4. Mind the tax loss deadline. You have until December 31, 2015 to harvest any tax losses and/or offset any capital gains. But be careful. There are distinctions between short- and long-term capital gains, and you must be aware of wash-sale rules (IRS Publication 550).

Under IRS rules, you cannot deduct losses from sales or trades of stock or securities in a wash sale. A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you:

  • buy substantially identical stock or securities
  • acquire substantially identical stock or securities in a fully taxable trade, or
  • acquire a contract or option to buy substantially identical stock or securities.

5. Gather the tax documents you’ll need to complete your tax returns. W-2s and 1099s won’t show up until next year, but everything from receipts for donations to business expenses will be needed if you are to minimize this year’s tax bite.

6. This brings us to mutual funds and taxable distributions. If you buy a mutual fund on, say, December 15 and it pays a dividend and capital gain on December 17, you will be responsible for reporting the entire distribution, even if that distribution covers the entire year.

Following that payment, the net asset value of the fund will fall by the amount of the distribution, but your investment in the fund remains the same.

Ouch! That’s a tax sting that’s best avoided.

7. Use it or lose it. As the year draws to a close, many people with a flexible spending account (FSA) for medical expenses must generally spend any savings or forfeit them.

Some FSAs offer a grace period, but when that grace period ends, the cash is gone, forever. Some plans allow up to $500 of unused money to carry over for use in the next year. Any unused amount in excess of the carryover amount is lost.

A plan may allow either the grace period or a carryover, but it cannot allow both (IRS Publication 969).

8. Note inflation adjustments. Various tax benefits increase due to inflation adjustments for 2015 (IRS Publication IR-2014-104).

a. The standard deduction rises to $6,300 for singles and married persons filing separate returns and $12,600 for married couples filing jointly, up from $6,200 and $12,400, respectively, for tax year 2014. The standard deduction for heads of household rises to $9,250, up from $9,100.

b. The personal exemption for tax year 2015 rises to $4,000, up $50 from 2014. However, the exemption is subject to a phase-out that begins with adjusted gross incomes of $258,250 ($309,900 for married couples filing jointly). It phases out completely at $380,750 ($432,400 for married couples filing jointly.)

c. Estates of decedents who die during 2015 have a basic exclusion of $5,430,000, up from $5,340,000 for estates of decedents who passed away in 2014.

d. The annual exclusion for gifts remains at $14,000 for 2015.

e. The exclusion from tax on a gift to a spouse who is not a U.S. citizen rises to $147,000, up from $145,000 for 2014.

f. The annual dollar limit on employee contributions to employer-sponsored healthcare flexible spending arrangements (FSA) rises to $2,550, up $50 dollars from 2014.

9. Contribute to a Roth IRA. A Roth gives you the potential to earn tax-free growth (not just deferred tax-free growth) and allows for federal-tax-free withdrawals if certain requirements are met. There are income limits, but if you qualify, you may contribute $5,500, or $6,500 if you are 50 or older (IRS Retirement Topics - IRA Contribution Limits).

If you satisfy the requirements, qualified distributions are tax-free. You can make contributions to your Roth IRA after you reach age 70 ½. You can leave amounts in your Roth IRA as long as you live. The account must be designated as a Roth IRA when it is set up.

You may also be eligible to contribute to a traditional IRA, and contributions may be fully or partially deductible, depending on your circumstances. The same contribution limit that applies to a Roth IRA also applies to traditional IRAs. Total contributions for both accounts cannot exceed the prescribed limit.

Although we won’t hit the 2015 deadline until April 18, 2016 (IRS Publication 509), let’s start thinking about funding your account if your income permits (Note: If you are a resident of Massachusetts or Maine, Patriots' Day [April 18] delays the due date for filing your income tax return until April 19).  The sooner the account is funded, the sooner you begin taking advantage of tax-deferred or tax-free growth.

10. Take required minimum distributions. Speaking of IRAs, RMDs are minimum amounts retirement plan account owners must withdraw annually, starting with the year they turn 70½ years old or, if later, the year in which they retire (IRS Retirement Topics - Required Minimum Distributions).

However, the first payment can be delayed until April 1 of the year following the year in which you turn 70½. For all subsequent years, including the year in which you were paid the first RMD by April 1, you must take the RMD by December 31 of the year.

The RMD rules also apply to 401(k), profit-sharing, 403(b), 457(b) or other defined contribution plan as well as SEP IRAs andSimple IRAs.

Don’t miss the deadline or you could be subject to steep penalties! If an account owner fails to withdraw the RMD by the deadline or the distribution is not large enough, you may have to pay a 50% excise tax on the amount not distributed as required.

11. Consider converting a traditional IRA to a Roth IRA. There are a number of items you may want to consider, including current and future tax rates, but if the situation is right, it can be very advantageous to convert to a Roth IRA.

12. Establish college savings. Explore the advantages of a 529 college savings plan for your child or grandchild.

A 529 plan is operated by a state or educational institution, with tax advantages that make it easier to save for college and other post-secondary training for a designated beneficiary.

Earnings are not subject to federal tax and generally not subject to state tax when used for the qualified education expenses of the designated beneficiary. Contributions, however, are not deductible.

A second but more limited option includes a Coverdell Education Savings Account (IRS Publication 970). Total contributions for a beneficiary of this account cannot be more than $2,000 in any year. Any individual (including the designated beneficiary) can contribute to a Coverdell ESA if the individual's modified adjusted gross income for the year is less than $110,000. For individuals filing joint returns, that amount is $220,000.

However, contribution limits begin to get phased out at $95,000 for individual filers and $190,000 for joint filers. As with a 529 plan, contributions are not tax deductible.

13. Do your charitable giving. Whether it is cash, stocks or bonds, you can donate to your favorite charity by December 31, potentially offsetting any income. 

Did you know that you may qualify for what’s called a “qualified charitable distribution?”  A QCD is an otherwise taxable distribution from an IRA (other than an ongoing SEP or SIMPLE IRA) owned by an individual who is age 70½ or over that is paid directly from the IRA to a qualified charity.

But there’s one small rub. QCDs, along with a number of “tax extenders” are expected to be renewed by Congress, but technically, they expired December 31, 2014 (IRS Charitable Donations from IRAs).

Assuming they are renewed with no changes, an IRA owner can exclude from gross income up to $100,000 of a QCD made for a year, and a QCD can be used to satisfy any IRA required minimum distributions for the year.

Married individuals filing a joint return could exclude up to $100,000 donated from each spouse’s own IRA, or $200,000 total.

Donations from an inherited IRA are eligible if the beneficiary is at least age 70½. Donations from a Roth IRA are also eligible.

You might also consider a donor-advised fund. Once the donation is made, you can realize immediate tax benefits, but it is up to the donor when the distribution to a qualified charity may be made.

I hope you’ve found this review to be educational and helpful, but remember, it is not all-encompassing. Once again, before making any decisions that may impact your taxes, please consult with your tax advisor.

Let me emphasize again that it is my job to assist you! If you have any questions or would like to discuss any matters, please feel free to give me or any of my team members a call.

As always, I’m honored and humbled that you have given me the opportunity to serve as your financial advisor.